These two companies have had contrasting fortunes due to the COVID-19 pandemic. Should investors buy the stay at home stock or the recovery play?
Sept. 19, 2020
Peloton‘s (NASDAQ: PTON) stock has more than tripled in 2020, while Planet Fitness (NYSE: PLNT) stock has fallen roughly 20%. These two companies demonstrate a shift in the fitness industry with consumers opting to workout from home rather than a gym. We delve into these two stocks and ask the question: which one is here to stay?
Peloton
Peloton is known for its high-end bike and treadmill which cost in the region of $2,000-$4,000 but has recently added a more affordable treadmill and a more expensive bike. These new additions should help to bolster demand. Although this appears to be costly, the cost of the hardware along with a subscription the average Peloton user will only pay a few dollars per workout each month.
The cost of the hardware is currently Peloton’s primary source of revenue; however, it is a mistake to view this as solely a hardware business. Subscription revenue is growing rapidly and in the most recent quarter, fiscal Q4 of 2020, represented one-fifth of revenue growing 99% year-over-year to $121.2 million. Total revenue for Q4 was $607.1 million, an increase of 172% year-over-year.
User engagement has continued to grow consistently with its 3.1 million members partaking in more workouts than before. The net monthly churn rate (cancels in the period divided by 3) was 0.75% in Q4, and the 12-month retention rate was 92%. This demonstrates the strength of the brand and customer loyalty, which should enable it to fend off competition.
Peloton appears to be an attractive investment and serves a much-needed purpose during these times with people staying away from gyms. Due to the recent run up the company is richly valued and there is likely to be volatility ahead, but long-term investors should prosper.
Planet Fitness
Planet Fitness is a franchisor and operates more than 2,000 gyms worldwide. It has undoubtedly been damaged by the pandemic and was forced to close its gyms, leaving just 1,500 locations open by the end of Q2.
Planet Fitness targets the segment of the population who are not gym users or feel intimidated in these settings, coupled with an affordable membership. This is what differentiates Planet Fitness from other gyms and has helped to fuel growth in the stock and members in recent years. At the end of Q2 Planet Fitness had roughly 15.2 million members globally.
Before COVID-19, Planet Fitness had 53 consecutive quarters of positive same-store sales which has now come to an end. Revenue in Q2 was $40.2 million compared with $181.7 million a year previously. This drop was mainly due to the decision to freeze members accounts when stores were closed. Planet Fitness has implemented steps to lessen the blow caused by COVID-19 such as executives reducing salaries and pausing its share repurchase plans. It also drew down $75 million in variable funding notes to improve its cash position.
Although the pandemic has caused problems for Planet Fitness, there is a silver lining thanks to its business model. Roughly 75% of the stores are owned by franchisees who own multiple locations, and the Chief Financial Officer said that these franchisees did not need to avail of financial help. Management believes that the current environment will enable Planet Fitness to widen its competitive moat over the long run, although there are significant short-term challenges.
CEO Chris Rondeau also stated that there had been consolidation in the space which will act as a tailwind in the coming years along with an increased emphasis on health and fitness. Planet Fitness plans to expand and open hundreds of new stores in the coming years and the potential to reach 4,000 alone across the U.S.
Planet Fitness and Peloton operate in the same industry but at two drastically different price points. This means that there is room for both to grow, and perhaps investors could own both the recovery play and the disruptor. It is highly unlikely that people in the future will opt to workout from home exclusively due to limitations such as space and lack of variation.
MyWallSt operates a full disclosure policy. MyWallSt staff currently hold long positions in companies mentioned above. Read our full disclosure policy here.